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So here’s the good news.  The Congressional Budget Office is projecting that the federal economic policies that will be in effect for the rest of 2012 and for 2013 will reduce the federal budget deficit by 4 percent of the gross domestic product (about $607 billion) between federal fiscal years 2012 and 2013.  These policies include the end of the “Bush Tax Cuts”, reduction in Medicare payments for physicians’ services, statutory caps on discretionary appropriations including defense, and automatic cuts in spending as required by the Budget Control Act if Congress cannot pass legislation that changes the existing law.

I can’t make a good argument that the deficit should not be reduced over the long-term, but here’s the bad news. If the changes now required by law are maintained the CBO projects that reduction of the deficit by 4% of GDP will cause a slow-down in the economy that will actually result in only a $560 billion reduction in the federal budget deficit between FY 2012 and FY 2013.   Further, the impact on the GDP of the reductions in spending mandated by current law will be to produce a contraction of 1.3% in the inflation-adjusted GDP for the first 6 months of 2013 with only 0.5% inflation-adjusted growth in GDP for the entire year.  A decline of 1.3% GDP for 6 months sounds like a recession to me.

The CBO estimates that removal of the policies now in place to reduce the federal debt would result in inflation-adjusted growth in the GDP of about 4.4% for calendar year 2013.  However, that of course means that the intended 5.1% reduction in the budget deficit would not occur and the federal debt would continue to rise faster than GDP, something which we must ultimately avoid, but surely there is a better strategy to get there.

I think that all of this leads to some fairly obvious conclusions.  First, the GOP and fellow travelers of the Blue Dog persuasion within the Democrat Party are throwing massive amounts of bull summarized by the slogan “Government doesn’t create jobs”.  Second, if Romney gets elected in November we are going to hear all about how the recession that will likely occur in the first part of 2013 is all Obama’s fault. Third, if the GOP gets its way and the “Bush Tax Cuts” are continued the problem is going to be even worse as the CBO predictions include the end to those cuts. My guess is that GDP would decline for all of 2013.  Fourth, the way out of this is to bring back a progressive income tax rate on individuals and on corporations to levels that permit deficit reduction without the budget cuts now required by law.  Speaking to the last conclusion, the CBO presents some solid data concerning what the spending cuts will do to the economy in the immediate future.  I haven’t seen anything similar from those who claim that the rich folks and corporation would create more jobs if the government would just cut spending and get out of the way.  At least in one case they seem to moving to Singapore.

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Comment Preferences

  •  Tip Jar (2+ / 0-)
    Recommended by:
    ColoTim, maybeeso in michigan

    Knowing the truth, even if disconcerting, is always better than a comfortable self-deception.

    by Old Gray Dog on Tue May 22, 2012 at 02:38:12 PM PDT

  •  the GOP wants to cripple the economy... (2+ / 0-)
    Recommended by:
    ColoTim, Icicle68

    and blame it on Obama and the Democrats. It is a scorched earth policy. Why are they scorching the earth? Because old white guys are a dying breed and it is older white guys that vote Republican. The changing demographics mean the Republicans are going to be the permanent minority sooner rather than later so they have to try anything they can to hold onto power and sabotaging the economy is the only thing card they have left to play.

    As a nation, the U.S. consumes the most hot dogs per capita. So you'd be wise to never underestimate our powers of denial.

    by jbou on Tue May 22, 2012 at 02:43:02 PM PDT

    •  I've had the same thought numerous times (1+ / 0-)
      Recommended by:

      recently and I'm an old white guy.  The whole affair reminds me of the south's reaction in the 1850s and 1860s when the traditional way of life was clearly not sustainable.  Of course it worked out well for them didn't it?

      Knowing the truth, even if disconcerting, is always better than a comfortable self-deception.

      by Old Gray Dog on Tue May 22, 2012 at 02:47:30 PM PDT

      [ Parent ]

    •  ...cripple the economy period. (0+ / 0-)

      Don't need an excuse for what they do best, Obama is just a bump in the road. They don't need numbers, just billions. The GOP will survive as long as there are billionaires.

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